A New New Deal

Putting together everything we've learned over the past 10 days about high finance in Manhattan, one thing is clear: If Eliot Spitzer had saved all the money he apparently paid"Kristen" and her co-workers at the Emperors Club, he could have bought Bear Stearns.

Manhattan's culture of conspicuous consumption and conspicuous collapse has been on display in recent days as it has not since 1929. Now, as then, an edifice of shaky credit is toppling. Now, as then, what we took to be prosperity turns out to have been a bubble.

The key lesson Americans need to learn from today's troubles is how to distinguish faux prosperity from the genuine article. Over the past hundred years, we've experienced both. In the three decades after World War II we had the real thing. Led by our manufacturing sector, productivity increased at a rapid clip and median family incomes rose at a virtually identical rate. The value of the American work product grew significantly and that value was shared with American workers.

But we've had other periods of apparent prosperity that were based not on broad increases in personal income but on the inflation of assets. So it was with stocks in the late 1920s, a time when most Americans lacked substantial purchasing power. So it was with the dot-com bubble of the late '90s. And so it was with the rising value of American homes in recent years.

In the broadest sense, the American economy over the past three decades has been powered by ever more ingenious extensions of credit to a people whose incomes were going nowhere, unless they were in the wealthiest 10 percent of the population. There were some limits, as a result of New Deal regulations, on how old-line banks could extend credit, but investment banks and other institutions not legally obliged to keep a certain amount of cash in reserve operated under no such constraints. The risk was that one day, burdened by debt and static incomes, American homeowners would have trouble making their payments and the house of cards would come tumbling down. But what were the odds of that?

Pretty good, it turns out. And out of this debacle emerge two paramount lessons for our highest-ranking policymakers: Regulate the American financial sector, which is now turning to the government for a bailout. And commit the government to doing all in its power to generate broad-based prosperity, through laws enabling workers to bargain collectively, through a massive public commitment to projects "greening" the economy, through provision of universal health coverage and affordable college educations.

These are themes that should be central to the candidacies of Barack Obama and Hillary Clinton. If the Democrats are to win this year and then govern effectively, they need to offer a new New Deal to the American people. John McCain is at a distinct disadvantage in such a discussion: As the self-proclaimed heir to Ronald Reagan's legacy, he's no friend of the original New Deal, much less a new one.

On the regulatory front, now that the Federal Reserve is extending credit to the 20 largest dealers in securities -- affording them the same advantages it had hitherto extended only to regulated commercial banks -- it's only proper that those firms be subjected to regulations similar to those under which banks operate (which themselves need strengthening). Otherwise, the government is assuming risks incurred by the wildest operators on the Street.

Which, of course, is exactly what the Fed did in agreeing to take $30 billion of Bear Stearns's riskiest securities off J.P. Morgan's hands as a condition of its purchase of Bear. The Fed justifies these extensions of credit and assumptions of risk as necessary to prevent a financial meltdown, and the Fed is probably right. But what about the issue of equity, in both senses of that word -- ownership and fairness?

Specifically, if the Fed's role in the Bear buyout is a model for its dealings in future Wall Street failures, it could well pay good money for warehouses of worthless paper while future J.P. Morgans make off with the money-making sides of the beleaguered banks. This solution doesn't look to be a great deal for the American public. It looks even worse when we recall that other governments -- including those of China, Abu Dhabi and Kuwait -- have also been bailing out our banks, through sovereign wealth funds, while getting shares in those companies in return.

Can't the American people get as good a deal as the Chinese when our government bails out a major American bank? At minimum, some public representation on the bank's board? Reshaping the U.S. economy, now part of the global economy, so that it actually benefits Americans won't be easy. But it must be done. Bring on the new New Deal.